Who Will Profit from Climate Change?

In the midst of a worldwide economic crisis, city officials and Wall Street executives are talking about turning the battered U.S. financial center into a global hub of green finance and environmental commodities trading.

The spark: draft energy and climate legislation unveiled by two senior House Democrats in Washington this week.

The cap-and-trade proposal from Reps. Henry Waxman of California and Ed Markey of Massachusetts has been the talk of the Wall Street Green Trading Summit, which wraps up today. Most of that talk has been positive, with investors and analysts viewing the measure as a kind of blueprint for the nation's economic future.

"It gives us some certainty about what the markets are going to look like," said Randy Lack of Element Markets.

To be sure, there are provisions that financiers are wary of – in particular, those concerning a federally mandated carbon market. Neil Cohn, senior vice president at MacQuarie Bank, complained that the bill "has made it pretty tough to find domestic offsets." Carbon offsets require low capital intensity and promise guaranteed returns.

What stands out to many here is that the bill reflects the position on cap and trade for greenhouse gases outlined by the U.S. Climate Action Partnership, a green coalition heavy on corporate membership.

"It's very heavily influenced by that," said Rubén Kraiem, a partner with the energy law practice Covington & Burling.

The Waxman-Markey proposal seems to offer confidence to many here that Congress is poised to pass a bill that offers more business opportunities than costs. New York is hoping to put itself in a position to capitalize on those opportunities.

Insiders say Michael Bloomberg, New York's independent mayor, has an explicit plan to encourage Wall Street to pull itself out of the dumps by financing renewable energy, "smart grid" technologies and other green innovations. As the city and state rely heavily on the financial sector for revenue, the move seems to be as much about survival as about helping to promote a U.S. shift toward sustainable energy.

Bloomberg's vision of New York becoming the center of a national clean energy movement was confirmed by Deputy Mayor Robert Lieber, who is in charge of economic development. Lieber's speech at the start of the green trading summit was designed to assure the financial community that the city was standing behind it at a very bad time.

"One of our key goals is to make sure that we can redeploy talent here in the city," Lieber said. "We just can't turn our backs on the financial services sector."

And money managers are lining up for the challenge.

"All of us here are playing a key role in bringing America back strong," said Andy Ertel, president of Evolution Markets.

'Huge playground'

There are signs that banks, fund managers and investors here are preparing for the next big thing.

Though unemployment is expected to continue to rise and the deep recession is seen lasting throughout 2009, analysts say the stock markets appear to be ending their wild swings and are bottoming out. Those who have cash on hand are looking to environmentally friendly asset plays for places to invest.

Some 97 green hedge funds are actively operating, and more are expected to enter the fray as economic conditions improve. Green hedge fund operators, including representatives from Brennan Investment Partners, CE2 Environment Fund and the New Energy Fund, will close out the conference today with a discussion of how they execute their strategies.

The event also features venture capital and private equity players who say activity is picking up again. One venture capital manager, ironically, compared the momentum to the start of the infamous dot-com push, noting that virtually all funds now take it for granted they need exposure to renewable energy and cleantech – regardless of how good the returns are.

"There are bucks to be made," said Neal Dikeman, a founding partner of Jane Capital. "Huge playground."

Larger Wall Street institutions had been pushing into the sector in 2007 and 2008 before the financial crash. Having pulled back sharply after Bear Stearns and Lehman Brothers Holdings collapsed, many now seem to be inching back, although the banks are still focused on shoring up their shaky balance sheets.

Morgan Stanley recently announced the formation of an Environment and Social Finance Group, putting industry veteran Audrey Choi in charge. Most other financial institutions, including Merrill Lynch, Barclays Capital and JPMorgan Chase, have also established environmental finance and carbon trading desks recently.

Capital is also seeking out not only younger cleantech startups but also older, larger corporations able to show investors they are focused on environmental stewardship, especially with regard to climate change.

Last month, Standard & Poor's launched a new stock market index designed to track the performance of "low carbon companies." The index includes most of the S&P's current benchmark companies, with 400 companies from the S&P 500 that "are deemed to emit few greenhouse gases relative to annual revenue," the company said in a release.

New "green" financial products also continue to emerge. Most are designed for sophisticated investors, but there are new offerings geared toward Main Street. These include a new green homeowners insurance policy just launched in New York by Fireman's Fund. Many banks here are also offering green car loans for hybrid vehicles and even home equity loans to help finance energy-efficiency retrofits.

For some time, institutional investors have been able to put money into carbon emission futures and options contracts, mostly tied to the European Union's Emission Trading Scheme and most recently the Regional Greenhouse Gas Initiative (RGGI) in the eastern United States.

But just before the economic crash, big banks had begun marketing carbon index funds for retail investors. Experts see the congressional moves toward cap and trade reviving this trend.

'I can see nirvana coming'

Indeed, the anticipation of a larger, federally regulated carbon market is the biggest driver behind the growing popularity of green finance, and experts say emissions trading and climate change-related investments stand the best chance of reviving Wall Street's fortunes.

Behind the scenes, much of the rebranding of the city into the nation's green finance capital is being pushed by the New York City Economic Development Corp.

One emissions trading analyst confirmed that corporation officials are actively seeking experts for advice on how best to ensure that New York's financial community can position itself ahead of the pack. The advice they are giving is to stake a big claim in the expanding U.S. carbon market, now largely dominated by the voluntary Chicago Climate Exchange.

New York has already missed out on the chance of becoming the center of market activity surrounding the Regional Greenhouse Gas Initiative, the nascent cap-and-trade program involving 10 Northeastern states and currently the nation's only mandated carbon emissions trading scheme.

Several New York institutions made bids to RGGI to run the auctioning of emission allowances to Northeastern energy producers, but the contract went to World Energy Solutions of Worcester, Mass. Landing the RGGI contract has been a boon to the previously unknown energy trading house – last year, World Energy's revenues increased 35 percent over 2007 levels, even as the global economy nose-dived and energy prices plummeted.

A federal carbon market would dwarf RGGI and all other emissions trading initiatives, including the European Union's massive program, and there is growing competition among commodity exchanges to become the center of that trading activity.

World Energy is expanding beyond its traditional auction model into exchange clearing. And Europe's BlueNext exchange, the largest platform for trading in E.U. allowances, is setting up shop in New York in anticipation of a federal cap-and-trade plan.

Though much of the trading volume can be found at the Chicago Climate Exchange and Chicago Climate Futures Exchange, activity is growing at the Green Exchange, an initiative launched by the New York Mercantile Exchange.

NYMEX's Green Exchange is already a popular platform for trading in sulfur dioxide and nitrogen oxide pollution permits, but the carbon markets should become the center of activity there. Officials say they hope the Green Exchange wins the blessing of the Commodity Futures Trading Commission to run independent of the NYMEX platform by this fall.

"A lot of trading is going to reside here in New York," said Peter Fusaro, chairman of Global Change Associates and organizer of the Green Trading Summit. "I can see nirvana coming."

The private sector is actively helping to propel the New York City Economic Development Corp.'s efforts.

Global Change Associates, NYMEX, PricewaterhouseCoopers and others host "introduction to carbon markets" courses every month for money managers and investors that are designed to teach New York's financial experts, including many recently laid off, the ins and outs of greenhouse gas emissions trading.

But the momentum building almost guarantees fresh excesses and abuses of the kind that came with previous Wall Street booms.

Andy Ertel of Evolution Markets urged his colleagues here to do all they could to discourage and distance themselves from the "Brooklyn Bridge salesman" who will inevitably come. He joked that he had already seen a Nigerian carbon market e-mail scam come across his desk.

"We're here about the environment first and making money second," Ertel said. "We have to be self-policing."